Chinese Money Exodus

“A fool and his money are soon parted”
– Dr. John Bridges’ Defence of the Government of the Church of England, 1587

 

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

 

If I were a Chinese national, I might worry about myself and my family as my basic human rights and freedoms are not protected.  I might want my children elsewhere so that they can have a better future.  And I might also be worried about the possibility of the confiscation of my wealth.  These kind of worries likely explains the emigration of Chinese people and the emigration of their money.  If I don’t try to get my money out and the Yuan devaluates, my wealth in foreign currency terms evaporates.  If I let that happen, then I am the fool – hence the quote!

Last year, Chinese millionaires maxed out the quota for EB-5 visas under the U.S.’s Immigrant Investor Program, and recently it was reported that 90% of Australia’s Significant Investor visas were given to Chinese nationals. All over the world, immigrant investor programs are being flooded with applicants from China.

China imposes restrictions on the ability to convert one’s Yuan to a foreign currency.  Source: http://www.eb5investors.com/blog/spotlight-on-chinese-currency-restrictions

This currency restriction protects China’s foreign currency reserves and avoids the potential for hyper-inflation.  We can go back in history and see many examples where hyper-inflation has occurred in currency restricted countries – take alook at Venezuela, Iran and Jamaica.

There are exceptions to this foreign currency restriction, like for overseas property purchases and emigration and such conversions do not constitute money laundering.  Such exceptions may explain why specifically real estate property values in cities like London, Sydney, San Francisco, Singapore, Vancouver and Toronto have skyrocketed.  As a result, property is becoming unaffordable for many middle income people and rental vacancy rates in Vancouver are now under 1% resulting in rental price rises.

With significant pressure to do something, the British Columbia government has recently announced a new “Additional Property Transfer Tax” effective August 2nd, 2016.  Source: http://www2.gov.bc.ca/assets/gov/taxes/property-taxes/property-transfer-tax/forms-publications/is-006-additional-property-transfer-tax-foreign-entities-vancouver.pdf

In addition to this tax, there is the possibility that the City of Vancouver will implement a vacancy property income tax.

I can appreciate the good intention of the BC provincial government and City of Vancouver to introduce such laws.  However, as a financial planner, I believe that the laws being put in place may not achieve the intended results.  Furthermore, I don’t think introducing these type of taxes considers the bigger picture.  My question is, “Can the immigration of wealthy and educated people to Canada and the “housing of part of their wealth here” not generate positive economic benefits for the Canadian people?”

If any type of tax were to be structured with the goal of benefiting Canadians that also recognizes the plight of the Chinese resident, a win-win situation could be achieved.

A vacancy tax is an interesting idea, but it is not easy to prove that a property remains vacant.  And in many cases, I believe such a tax could be easily avoided.  (I personally like the idea of a higher tier of property tax – could be say three to five times the amount of current tax for those who are non-residents; this way they are contributing to the expenses of the city).  I would also encourage hiring more city workers to help get building applications approved much more quicker so more housing units may be built.

I challenge our government to develop tax measures that (i) are beneficial to Canadians – homeowners and those that are not, (ii) are effective and have a likelihood of generating significant tax revenues, (iii) treat our Chinese brothers and sisters well and welcome them and their money to Canada.  Let’s help keep Canada as the best country in the world to live in!

So let’s get back to our Chinese national and see how he will likely get around the new Additional Property Transfer Tax:

1. Make the owner a Canadian resident or Canadian citizen

  • A pregnant Chinese national might come to a hospital in Richmond, BC to have her baby –  the child can now be a home owner without being subject to the tax.  This also opens the door for the wife and children to immigrate;
  • have a Canadian buy the property, put into a corporation and then at some point sell the shares to you (we have to be mindful of the possibility of anti-avoidance tax provisions);
  • make the property owner an entity that is not a ‘Foreign Entity’
    (i)  have a Canadian Trustee of a Canadian Trust which owns a Canadian corporation that buys the real estate;
    (ii) Canadian corporation that buys the property is owned by a second Canadian corporation (holdco) that is owned by a Canadian Trust which might have a foreign person controlling it or is a beneficiary.

2. Buy property that is exempt from the tax

  • buy non-GVRD real estate or property in Tsawwassen, Whistler, or the Okanagan – who cares where if it helps you get your money out.  You can always switch to GVRD residential property once you become a Canadian resident;
  • buy property that is non-residential property and seek other avenues to convert your Yuan to foreign currency; eg. You might then be able to buy office property, industrial / commercial property, agricultural land – maybe the property has the ability to rezone to residential.

You can expect wealthy Chinese nationals, who have been smart enough to figure out how to get their money out of China, are more than capable to get around these new tax measures.  See: http://articles.economictimes.indiatimes.com/2015-11-09/news/68134067_1_mongkok-hong-kong-chinese-customs

Will we soon see a correction in real estate prices?

When we look at housing affordability, I don’t expect housing to get any cheaper in terms of Market Price to Household Income, Market Price to Rent or Market Price per square foot.  It is just as likely to get even more expensive if the flow of funds from China continues.  It is unlikely for prices to really drop until flows from China subside, a significant rise in interest rates, or a depression occurs (a recession might not do the trick as there are likely renters or people outside Vancouver who would buy on any weakness).

I still remember during my MBA studies speaking with Germans who told me they never dream of buying a home but instead buy nice clothes, have fun and go on nice vacations.  Don’t forget Vancouver is a highly desirable city in terms of climate, location, safety (you can still walk almost anywhere and feel relatively safe), protection of human rights and freedoms, low pollution, good educational system, and tax free gains on Principal Residence.  Renting should only be considered for short periods of time.  Renting is really throwing away your money.

Summary

If you are new to Canada, considering moving to Canada or considering housing some of your wealth here, and you’d like to work with an advisor that is respectful and capable, please call me: (604) 288-2083 Extension 2 or email me: Steve@lycosasset.com.

Steve Nyvik

Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P. WHAT I DO: Steve builds, from blue-chip dividend paying stocks and bonds, a tax efficient 'pension' designed to meet your needs through time without taking unnecessary risk. Financial planning advice and service are included to make sure that if ‘life happens to you’, your goals aren’t derailed in the process. Phone: (604) 288-2083 (extension 2) Toll Free: 1 (855) 855-9267 (extension 2) Email: Steve@lycosasset.com